Investors Crowd Into St. Louis Craft Breweries With $40 Million In Expansion Plans

St. Louis Business Journal:

by E.B. Solomont

A banker walks into a bar and writes a check for $5 million. Happens all the time, right?

In the case of Urban Chestnut Brewing Co., it took a bit more convincing. But not much.

Banker David Minton had been to Urban Chestnut for a beer before his longtime customer, Phil Hulse of Green Street St. Louis, broached the idea of underwriting part of the brewery’s $10 million expansion. Minton, president of Heartland Bank, said he was swayed by Urban Chestnut’s local-guys-make-good story. “Microbreweries are … a revitalizer of areas,” said Minton, who met with Urban Chestnut’s David Wolfe and Florian Kuplent several times to hammer out details of Heartland’s $5 million loan for the brewery’s equipment. “What Schlafly’s done with the Taproom (downtown) and Bottleworks in Maplewood have been good for pockets of our city,” he said.

Bankers like Minton, and private equity firms like Sage Capital and others around the country, are stepping up to support the craft beer boom. That growth is not only fueling expansion projects, to the tune of $40 million and counting, but it’s creating a local industry around beer, from ingredient vendors and retailers to label and tap handle makers.

Not surprisingly, many of the newer breweries have ties to Anheuser-Busch, including the two-year-old brewing company started by Busch heir Billy Busch, as well as O’Fallon Brewery, headed by A-B alum Jim Gorczyca, and Urban Chestnut, led by Wolfe and Kuplent, who met at A-B.

St. Louis is now home to nearly a dozen new breweries, and several are expanding. Construction is under way on Urban Chestnut’s $10 million second brewery, and last month, Schalfly detailed plans for a $20 million expansion. O’Fallon Brewery is spending $8 million on a new facility, and 4 Hands Brewing Co. is adding tanks as it launches in Chicago, while Perennial Artisan Ales is adding a canning line.

The expansions come as local and national statistics show demand for craft brew continues to grow. Nationwide, craft beer sales increased 15 percent in the first half of the year, according to the Brewers Association, and Missouri brewers produced 268,003 barrels of craft beer last year, up from 229,648 barrels in 2011.

Industry watchers predict that craft beer, which accounts for 7 percent of the beer market, will represent 15 percent of the market within the next decade. “That’s a lot of money at play,” said Bill Anderson, founder and CEO of First Beverage Group, a Los Angeles-based financial services group specializing in the beverage industry.

But it’s also a lot of competition. “If you’re starting up one today and you’re No. 4,000, I think it’s going to be very hard to both get strong distributor support and find shelf space at retail,” Anderson said.

Locally, St. Louis has a “relatively modest” craft market, representing just 5 percent of beer sales, said Benj Steinman, president of Beer Marketer’s Insight. Anheuser-Busch has 62.4 percent market share in Missouri, he said, compared with 30.3 percent market share in Oregon, where craft accounts for more than 40 percent of draft beer. “But there is rapid growth and a lot of new players and people putting money behind it,” he said.

Urban Chestnut’s Wolfe said he and Kuplent didn’t anticipate such rapid growth when they launched two years ago after raising $1.5 million from friends and family and investing personally. Urban Chestnut brewed 1,700 barrels its first year, and doubled its volume with 3,400 barrels last year. It’s on track to brew 7,000 barrels in 2013. “If we want to continue to grow, we either have to contract brew or we could essentially open up a second operation,” Wolfe said.

The partnership with Green Street, which bought the land and building housing the brewery, is making the project affordable. “It would have been difficult to secure for a young business” without Green Street, Wolfe said.

Green Street’s Hulse called the project a “partnership,” but said he was impressed with Urban Chestnut’s track record. “These guys have the depth of experience that comes from being with a big company and also have the marketing, distribution skills and expertise.”

4 Hands Brewing Co., which is spending $130,000 to expand, launched 20 months ago with $750,000 raised from family and friends, said owner Kevin Lemp. Production is up, thanks to bottles and a Chicago launch.

Lemp is using cash flow to pay for more tanks, which he said will boost capacity to 12,000 barrels from more than 7,000.

Jim Gorczyca of O’Fallon Brewery plans to tap individual investors for a planned $8 million expansion. He said the brewery is at capacity, having doubled production to 10,800 barrels in 2012, thanks to new wholesale agreements and territory. The new brewery would have capacity for 25,000 barrels a year, enough so that O’Fallon could increase production and become a regional brewer.

O’Fallon currently brews 3,000 barrels on site, and contract brews another 8,000 barrels in Wisconsin. “I’m willing to give up some of that (ownership) to make a bigger dream possible,” Gorczyca said.

6 Row Brewing Co. launched in 2008 with backing from six investors who pooled under $1 million. “We liked what the craft brewery market was all about,” said co-owner Mike Rami, a banker at R.L. Hulett & Co. Inc. (His cousin is married to Evan Hiatt, 6 Row’s head brewer.) “You don’t invest in something because you think you’re going to get rich overnight. You invest in what you know or you invest in what you like.”

That said, Rami and 6 Row’s others investors want it to become a regional brewery. “The craft beer industry was and still is on a growth pace,” Rami said. “We felt like it was something we could capitalize on.”

Other investors have written checks in the same vein. “Private equity is starting to get involved,” Steinman said. “They see the growth potential.”

St. Louis Brewing Co., which operates as Schalfly, disclosed plans for a $20 million new brewery about a year after selling a majority stake to local investors led by Sage Capital, a local private equity group. “We invested in Schlafly originally both because we believed in the business and because we thought it was in the best interest of the business and the local community that Schlafly remain based here,” Sage Managing Partner John Lemkemeier said in an email.

For Chesterfield-based Brew Hub, which is building a network of contract breweries around the country, a financial partner was key to building the business on a large scale, said Founder Timothy Schoen, a former A-B executive. Brew Hub is backed by Ron Burkle’s Los Angeles-based Yucaipa Cos.

Brew Hub’s first, 51,000-square-foot brewery, located in Lakeland, Fla., has a price tag of $20 million and is set to open next spring. “The real play for Brew Hub is not one Brew Hub in the Southeast,” said Schoen, who’s known Burkle for 20 years, dating back to when Burkle ran a grocery chain that carried A-B beer.

Still it’s not always easy to land investors.

Joe Lonero, a real estate developer, put $1.2 million into Ferguson Brewing Co. after investors failed to materialize in 2008. Lonero pursued the project and still owns the brewery, said his son Mike, because craft was becoming popular and “there’s good profit in making beer.”

Justin and Jerid Safell, brothers who recently opened Heavy Riff Brewing Co., said they raised $150,000 from friends and family. But they’ve had unexpected costs, too, like replacing an electrical system for $11,000. Heavy Riff has 2,000 square feet of space, and also contract brews at Excel Brewing, in Breese, Ill.

Family-owned Excel, known for its Ski soda, spent $750,000 to add a brewery operation last year to its $4.2 million soda business. Within the first few months, it added two 40-barrel fermentation tanks. “Our increase is coming from co-packing other people’s beer,” said owner Bill Meier, who estimates he’ll produce 1,000 barrels this year.

As for capacity, there’s room to grow – but not much. “Everyone wants a nice new building, trucks. But you really have to look at, given that investment, what is the true return on that investment?” Meier said.